Landlord-Tenant—Rent Stabilization Tenant Asserted Overcharge Claim Against Landlord in April 2009, Almost 51/2 Years After She Occupied Apartment Under A Vacancy Lease—Based On Strong Evidence of Fraud and Prior Judicial Precedent, Overcharge Claim Was Timely—Dissent Asserted That the Claim was Barred by the Statute of Limitations

RENT-STABILIZED TENANTS asserted an overcharge claim against their landlord in April 2009, approximately five and one-half years after they initially occupied the apartment pursuant to a vacancy lease. The salient issue before the New York Court of Appeals (court) was "whether CPLR 213-a's four-year statute of limitations [SOL] completely bars this claim." Since there was "unrefuted proof of fraud in the record," the court held that "Section 213-a merely limits tenants' recovery to those overcharges occurring during the four-year period immediately preceding [tenant's] rent challenge, and that the lawful rent on the base date must be determined by using the default formula devised" by the NYS Division of Housing and Community Renewal (DHCR).

One of the tenants had signed a two year lease in October 2003. Beginning on Nov. 1, 2003, the monthly rent was $1,800. The lease indicated that the legal regulated rent was $2,000 per month, reduced to $1,800, "'subject to any lawful adjustments,' by virtue of a temporary rent concession rider." The lease did not include a rent stabilization rider. The rider was required for "vacancy leases subject to the Rent Stabilization Code." It advises "rent-stabilized tenant[s] of the prior legal regulated rent and explains how the vacancy lease's rent was computed." The tenant renewed the lease for two years beginning Nov. 1, 2005, at a monthly rent of $1,899. Another one-year renewal lease was signed beginning Nov. 1, 2007 at a monthly rent of $1,955.97.

On April 9, 2009, the landlord commenced a summary holdover proceeding for nonpayment of rent. The tenant counterclaimed for breach of the warranty of habitability (WOH) and rent overcharges.

The Civil Court dismissed the overcharge claim without prejudice for failure of proof. However, evidence indicated that although the landlord had registered someone named "A" with DHCR as the apartment's occupant pursuant to a two-year lease, running from April 1, 2003 through March 31, 2005, at a monthly rent of $1,000, the "tenants had presented 'persuasive evidence' that no one named ['A'] had ever lived in the apartment." The Civil Court found that the landlord had "created an entirely fictitious tenant…and at least one entirely fictitious…renovation in 2003 in order to boost the regulated rent from $475.24 per month…to $1,800.00." Thus, the "rent on the base date was obviously affected by [landlord's] fraud." The court stated that:

'[o]rdinarily' a rent overcharge claim is governed by a four-year statute of limitations. Further, '[t]he legal regulated rent is the rent actually charged and paid on the base date, four years prior to the interposition of the overcharge claim, plus any legal increases taken thereafter.' Here, she opined, the claim was interposed on April 9, 2009, when the summary nonpayment proceeding commenced, which made April 9, 2005 the base date, and the evidence failed to show any impermissible rent increases after that date.

The court, citing Matter of Grimm v. State of N.Y. Div. of Hous. & Community Renewal Office of Rent Admin., 15 NY3d 358 (2010) (Grimm), explained that it had an obligation to "investigate the legality of the base date rent." The court thereafter dismissed the overcharge complaint and granted an abatement based on the WOH.

In 2011, the tenants brought an action for a money judgment based on rent overcharges and sought treble damages for the period April 2007 through April 2009.

Based on the four-year statute of limitations embodied in CPLR 213-a, the landlord argued that since the present action had not been commenced until June 2011 and since the alleged overcharge accrued in 2003, the action was time barred. The trial court held that the "claim was not time-barred because 'rather than calculating the statutory period from the commencement of the overcharge, such claims are determined backwards, from the date of the first claim of an overcharge.'" The base date was April 2005, four years prior to the assertion of the overcharge counterclaim. However, the court reasoned that the rent charged on that date cannot be the base rate since, as the Civil Court held, there was evidence that the base date rent was based on a fraudulent scheme. The Appellate Division, First Department affirmed. The Court of Appeals (court) also affirmed.

The landlord had argued that since the tenancy had begun on Nov. 1, 2003, the tenant had until Oct. 31, 2007, to assert a rent overcharge claim. However, the tenant did not pursue her overcharge claim until April 2009.

The tenant asserted that the four-year statute of limitations should be applied backwards from the date that the overcharge had been asserted, i.e., the rent stabilization base date was April 9, 2005, four years before the rent overcharge counterclaim. Since the rent charge on the base date was predicated upon fraud, such rent should not be used to calculate subsequent lawful increases. The tenant contended that such rent should not be utilized to determine subsequent increases.

CPLR 213-a fixes a four-year statute of limitations for claims of residential rent overcharge; specifically, this provision states that "[a]n action on a residential rent overcharge shall be commenced within four years of the first overcharge alleged and no determination of an overcharge and no award or calculation of an award of the amount of any overcharge may be based upon an overcharge having occurred more than four years before the action is commenced. This section shall preclude examination of the rental history of the housing accommodation prior to the four-year period immediately preceding the commencement of the action…."

Citing Thornton v. Baron, 5 NY3d 175 (2005) and Grimm, the court accepted the tenant's reasoning. Thus, the court held that the trial court had "properly considered tenants' counterclaim alleging rent overcharges notwithstanding expiration of the four-year [statute of limitations] to which such claims are generally subject…." The court noted that the landlord had a "stratagem" to "remove tenant's apartment from the protections of rent stabilization…."

The dissent argued that the court in Thorton, had "avoided" the subject issue and there was no need to address such issue in Grimm. The court's majority asserted that although the dissent "frets that our decision today 'will have serious and troublesome ramifications,'…the potential untoward consequences mentioned are the same as those identified in the Thorton and Grimm dissents." Thus, such concerns were "considered and rejected by the majorities in Thorton and Grimm…."

The court also rejected the landlord's argument that collateral estoppel was inapplicable to the fraud findings made by the Civil Court. The court emphasized that the extensive evidence of fraud before the Civil Court was "unrefuted" and sufficient to "taint the reliability of the rent on the base date…." and both sides had ample opportunity to submit evidence and cross examine witnesses.

The dissent argued that neither Thornton nor Grimm decided the subject statute of limitations issue. The dissent reasoned that CPLR 213-a provided that "[a]n action on a residential rent overcharge shall be commenced within four years of the first overcharge alleged…." The dissent believed that the majority "simply removed the statute of limitations from the statute" and that "any exception to be made to allow these types of claims to proceed outside of the applicable statutes of limitations would be for the Legislature to enact…."

The dissent asserted that rent regulations will "be subject to challenge indefinitely" and real estate buyers and sellers will have no certainty as to the value of residential rental property. "Landlords will have to keep evidence of rent charges indefinitely, in order to preserve their ability to defend against fraudulent rent overcharge claims. And endless litigation will ensue concerning whether tenants are making 'a colorable claim of fraud within the meaning of Grimm, before any complaint challenging years-old rents can be dismissed."

Comment: James B. Fishman, of Fishman & Mallon, attorney for the tenant, states the following: "[c]ontrary to concerns of 'confusion' expressed by the landlord bar, the Court of Appeals simply clarified in Conason that fraudulent conduct by landlords will not be tolerated and that rents that are illegally increased by fraud will not be carved in stone, no matter how long after the fraud occurs. Landlords who do not engage in fraud have nothing to be concerned about. For too long, the IAI (individual apartment improvement)system has been rife with fraud due to the failure and refusal of the DHCR to oversee the process. Landlords have gotten away with rent increases for non-existent vacancy improvements for all too long. Conason will help undo some of that fraud."

Umar A. Sheikh, of Sheikh Partners, the attorney who argued the case for the landlord when he was with Marino Partners, expressed his agreement with the dissent, i.e., that this was a case that was "filed beyond the statute of limitations."

Appellate Division, First DepartmentPublished by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.This opinion is uncorrected and subject to revision before publication in the Official Reports.

Plaintiff Julie Conason signed a rent-stabilized lease commencing in November 2003 for apartment 3 in defendant landlord Megan Holding’s building at a monthly rent of $1,800, and signed renewal leases in 2005 and 2007 at rents of $1,899 and $1,955.97, respectively. Although the lease was for a rent-stabilized apartment, there was no rent-stabilized rider attached to it.

In December 2003, after plaintiffs had commenced occupancy, Megan registered the apartment with the New York State Division of Housing and Community Renewal (DHCR). The registration showed that the monthly rent for the previous tenant, Oki Suzuki, was $1,000 per month, and the monthly rent paid by the tenant preceding Suzuki was $475.24. In 2009, Megan brought a nonpayment summary proceeding against plaintiffs in Civil Court. Plaintiffs’ answer alleged harassment, breach of the warranty of habitability, and rent overcharges, and sought attorneys’ fees pursuant to Real Property Law § 234.

After trial,[FN1] the court found that Megan had fraudulently listed Suzuki, a nonexistent tenant, as the prior occupant, and claimed nonexistent improvements to the apartment to inflate the rent. The court also found that the base rent for the rent overcharge claim was affected by the fraud. However, the court dismissed the rent overcharge claim without prejudice because plaintiffs had not proved the amount of the legal regulated rent; they failed to submit evidence of the rent for any other apartment in the building on the base date. The court awarded plaintiffs judgment for an abatement on their breach of the warranty of habitability claim, and, after a further hearing, attorneys’ fees by separate judgment.

In June 2011, plaintiffs commenced this action against Megan and its principal, Ku, in Supreme Court to recover the rent overcharges, treble damages pursuant to Rent Stabilization Code (RSC) (9 NYCRR) § 2526.1(a)(1), and attorneys’ fees pursuant to the lease, Real Property Law § 234, Rent Stabilization Law (RSL) (Administrative Code of City of NY) § 26-516(a)(4), and RSC § 2526.1(d). Plaintiffs alleged that defendants had falsely registered the apartment as occupied by fictitious tenant Suzuki. They further alleged that Ku was liable because he had abused the corporate form by intermingling the assets of his numerous companies, including Megan, with his personal assets. Plaintiffs then moved for summary judgment based on the collateral estoppel effect of the factual finding of Civil Court that defendants had committed fraud. They submitted a copy of the certified DHCR rent roll to show, for overcharge calculations, the lowest rent charged for a rent-stabilized apartment with the same number of rooms in the same building as the subject apartment, which was $180.92. As to Ku’s liability, plaintiffs submitted evidence to show that Ku used his numerous LLCs interchangeably, listed the subject building as solely owned by him, and did in fact own 99% of it, had sold the building from one of his other LLCs to Megan for nominal consideration, and used the building as collateral for a mortgage loan to both Megan and another LLC.

Defendants cross-moved for summary judgment dismissing the complaint on the ground that the rent overcharge claim accrued from the first overcharge in 2003 and was thus barred by the four-year statute of limitations (CPLR 213-a).

We are not persuaded that plaintiffs’ overcharge claim is barred by the four-year statute of limitations. As we noted in Matter of Grimm v State of N.Y. Div. of Hous. & Community Renewal Off. of Rent Admin. (68 AD3d 29, 32, affd 15 NY3d 358, 366 [2010] [citations ommitted]), “while the applicable four-year statute of limitations reflects a legislative policy to alleviate the burden on honest landlords to retain rent records indefinitely,’ and thus precludes us from using any rental history prior to the base date, where there is fraud . . . the lease is rendered void[,]” and the legal rent is to be determined by the default formula (id. [citation omitted]; see also Thornton v Baron (5 NY3d 175, 180-181 [2005]). We went on to note that “[s]anctioning the owner’s behavior on a statute of limitations ground can result in a future tenant having to pay more than the legal stabilized rent for a unit, a prospect which militates in favor of voiding agreements such as this in order to prevent abuse and promote enforcement of lawful regulated rents'” (Matter of Grimm, 68 AD3d at 32, quoting Drucker v Mauro, 30 AD3d 37, 40 [2006], lv dismissed 7 NY3d 844 [2006]; see also Thornton, 5 NY3d at 181 [“an unscrupulous landlord . . . could register a wholly fictitious, exorbitant rent and, as long as the fraud is not discovered for four years, render that rent unchallengeable”]). We thus hold that the four year statute of limitations is not a bar in a rent overcharge claim where there is significant evidence of fraud on the record (cf. Matter of Grimm v State of N.Y. Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d 358 [2010]).[FN2]

Supreme Court correctly found that defendants were collaterally estopped from arguing that no fraud existed (Matter of Abady, 22 AD3d 71, 83-84 [1st Dept 2005] since “Megan was represented by counsel during most of the trial, was afforded the opportunity to acquire new counsel when its lawyer withdrew for ethical reasons, failed to obtain successor counsel, declined to present a defense, submitted a post-trial brief, and failed to appeal the determination.” Supreme Court also properly determined the base rent based on the default formula (see Grimm, 15 NY3d at 366), and deferred the determination of the amount of the overcharge for a hearing.

The court properly pierced the corporate veil (James v Loran Realty Corp., 20 NY3d 918 [2012]). There is evidence that Ku abandoned the corporate form. For instance, in a loan application Ku claimed 16 LLC properties, including the subject building, as his own property. There is also evidence of the habitual transfer of funds to and from Ku’s individual account, which indicates the intermingling of funds. Ku also used personal funds for Megan expenditures and used Megan funds for expenditures by other LLCs. There is also evidence that, through Megan, Ku fraudulently set a rent for plaintiffs’ apartment and that plaintiffs were financially injured thereby (Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141 [1993]).

Supreme Court properly awarded treble damages and attorneys’ fees. Defendants failed to prove by a preponderance of the evidence that the rent overcharge was not willful (see 9 NYCRR 2506.1[a][1]). Nor were they able to show that respondents are not entitled to an award of attorneys’ fees pursuant to Real Property Law § 234, RSL § 26-516(a)(4) and RSC § 2526.1.

THIS CONSTITUTES THE DECISION AND ORDEROF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

ENTERED: SEPTEMBER 24, 2013

CLERK

Footnotes

Footnote 1:Completion of the trial was delayed by the withdrawal of Megan’s counsel and Megan’s failure to retain new counsel during a seven week adjournment for that purpose. Although Megan’s principal, defendant Ku, testified as the tenants’ witness, Megan rested without presenting any evidence on its own behalf; new counsel submitted a post-trial memorandum on its behalf.

Footnote 2:To the extent that Direnna v Christensen (57 AD3d 408 [1st Dept 2008]), decided two years before Grimm, is inconsistent with our ruling today we choose not to follow it inasmuch as there was no evidence of fraud on the record in Direnna.